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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Encore Wire Fourth Quarter Earnings Conference Call. My name is Maddie and I will be your operator for today's call. [Operator Instructions]
I will now turn the call over to Daniel Jones, Chairman, President and CEO. Mr. Jones, you may begin.
Yes. Thank you, Maddie and good morning, ladies and gentlemen and welcome to the Encore Wire Corporation quarterly conference call. As stated, I’m Daniel Jones, the President, Chief Executive Officer and Chairman of the Board of Encore Wire. With me this morning is Frank Bilban, our Chief Financial Officer. We're pleased to report a great fourth quarter and full year. Our unit sales were up in both copper and aluminum building wire for the year. One of the key metrics to earnings is the spread between the price of copper wires sold and the cost of raw copper purchased in any given period.
The copper wire spread increased 9.9% in 2017 versus 2016, as the average price of copper purchased increased 25.4% in 2017 versus 2016. And the average selling price of wires sold increased 19.8%. We're also encouraged by the fact spreads improved during the fourth quarter of 2017 versus the third quarter of 2017. Copper spreads increased on a sequential quarterly comparison, climbing 2.7%.
In addition, as a result of the December federal tax legislation changes, we recognized a $13.5 million decrease in our deferred tax liability offset by the special bonus of $1,000 we gave to all of our employees, except for the corporate officers, resulting in a net one-time gain of $0.60 per share. The $2.61 in net earnings per common share from core operations is the second best year in our history and is a 60% increase over last year.
The overall construction and building wire markets remained strong. Anecdotal information confirms our belief that there are still large commercial and industrial projects in the pipeline. The US economy appears strong, as in the construction activity and we believe that some of our financially stressed competitors have struggled an acted erratically in what we consider a strong business environment.
When volumes are good, margins should also be strong. Based on discussions with our distributor customers and their contractor customers, we believe there's a good outlook for construction projects for the next year. We continue to strive to lead and support industry price increases in an effort to maintain and increase margins. We believe our superior order fill rates continue to enhance our position.
As orders come in from electrical contractors, the distributors can count on fill rates to ensure a quick delivery from coast to coast. We believe our performance is impressive and we think our employees and associates for their efforts. We also thank stockholders for their continued support.
Frank Bilban, our Chief Financial Officer will now discuss our results. Frank?
Thank you, Daniel. In a minute, we'll review Encore’s financial results for the quarter. After the financial review, we'll take any questions you may have. Each of you should have already received a copy of Encore’s press release covering Encore’s financial results. This release is available on the Internet or you can call Denis McCarthy at 800-962-9473 and we’ll be glad to get you a copy.
Before we review the financials, let me indicate that throughout this conference call, we may make certain statements that might be considered to be forward-looking. In order to comply with certain securities legislation and instead of attempting to identify each particular statement as forward-looking, we advise you that all such statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed today. I refer you to view to the company's SEC reports and news releases for a more detailed discussion of these risks and uncertainties.
Also, reconciliations of non-GAAP financial measures discussed during this conference call to the most directly comparable financial measures presented in accordance with GAAP, including EBITDA, which we believe to be useful supplemental information for investors, are posted on our website, www.encorewire.com.
Now the financials. Net sales for the fourth quarter of 2017 were $301.3 million compared to $239.2 million during the fourth quarter of 2016. Unit volume, measured in copper pounds contained in the wires sold, increased 5.8%, and the average selling price per copper pound sold increased 22.8% in the fourth quarter of 2017 versus the same period in 2016. Sales prices increased primarily due to higher copper prices, which increased 30.1% versus the fourth quarter of 2016.
Net income for the fourth quarter of 2017 was $28.5 million versus $11.4 million in the fourth quarter of 2016. Fully diluted net earnings per common share were $1.36 in the fourth quarter of 2017 versus $0.55 in the fourth quarter of 2016. The $1.36 fully diluted net earnings per common share in the fourth quarter of 2017 include $0.76 from core operations and $0.65 from the adjustment of deferred tax liabilities, offset by $0.05 associated with a special bonus of $1,000 paid to all employees of the Company except corporate officers.
Net sales for the year ended December 31, 2017 were $1.164 billion versus $940.8 million during the same period in 2016. Copper unit volume increased 5.6% in 2017 versus 2016, coupled with a 19.8% increase in the average selling price per copper pound sold in 2017 versus 2016. Sales prices increased primarily due to higher copper prices, which increased 25.4% in 2017 versus 2016.
Net income for the year ended December 31, 2017 was $67 million versus $33.8 million for the same period in 2016. Fully diluted net earnings per common share were $3.21 for the year ended December 31, 2017 versus $1.63 for the same period in 2016. As delineated for the fourth quarter of 2017 above or earlier, the resulting fully diluted net earnings per common share for the year from core operations were $2.61 per share.
On a sequential quarter comparison, net sales for the fourth quarter of 2017 were $301.3 million versus $292 million during the third quarter of 2017. Copper unit volume decreased 1.7% on a sequential quarter comparison, in line with the fact that the fourth quarter is generally a slightly slower quarter in the construction and building wire industries.
The unit volume decrease was more than offset by the 5.7% increase in the average selling price of wire per copper pound sold. Net income for the fourth quarter of 2017 increased to $28.5 million versus $14 million in the third quarter of 2017. Fully diluted net income per common share was $1.36 in the fourth quarter of 2017 versus $0.67 in the third quarter of 2017.
Our balance sheet remains very strong. We have no long-term debt, and our revolving line of credit is paid to zero. In addition, we had $123.4 million in cash at the end of the quarter. We also declared another cash dividend during the quarter.
This conference call will be available for replay after the conclusion of this session. If you wish to hear the tape replay, please call (888) 843-7419 and enter the conference reference number 8977327 and the pound sign, or you can visit our website.
I'll turn the floor back over to Daniel Jones, our Chairman, President and CEO. Daniel?
Thank you, Frank. As we highlighted, Encore performed well in the past quarter and we believe we are well positioned for the future. Maddie, we will now take questions from listeners.
[Operator Instructions] And in the queue we do have a question from Bill Newby from DA Davidson.
I guess, first off, have you guys seen any I guess different behaviors from your distributors with the price -- metal price movements that you've seen? Are they being any more speculative in terms of building inventories?
If you're speaking specifically to ’17 in Q4, that was the most expensive quarter in 2017 for copper. I think the average was over $3 in the fourth quarter, some of that nature in the second quarter was the low at 257 or 258. From that perspective, typically in the past, Bill, what's happened in our industry is we tend to make a little more money when there's a slow methodical increase in copper, which we have not had in quite a while. We're getting quite a bit of volatility within the same category.
The volatility itself has led to -- and we've had enough of it over time where the jobs and the business that are coming out are moving forward. So, regardless of interest rates or financial influences of really any magnitude, the cycle continues and when our product delivers into that building wire cycle, it's typically shielded from those financial influences, including sometimes the price of the metal swing one way or the other. Most of the deals are done and shipping out pretty quickly.
The lead time from a purchase order to delivery has shortened, which helps with the volatility of the metal. As far as adding things to stock, because of the volatility, the reverse is true. From what we see, most of our distributors are keeping inventories as lean as possible, because of the volatility, which kind of feeds into our model a little bit better with our fuel rates and short lead times in the fifty states.
And then one more, have you guys, I guess, after the General Cable acquisition by Prysmian there late in 2017, I guess any thoughts on that and specifically how you see it playing out in the aluminum market?
A lot of thoughts on them, but supposition and whatever, but our guess is that Prysmian had a really good, well thought out plan. And they’re most likely in a process of evaluating what they have from what they've bought and sorting out different people's responsibilities and what have you like anybody would be and once those lines are clear on who's going to be responsible for what product categories, I think we'll have a better picture, but overall without, I don't want to get in names or anything, but in that process, my personality thinks it has to be better with Prysmian watching the bottom line versus what we were going through for the few years there that they clearly were for sale -- were generally for sale in the market.
And our next question comes from Chris McCampbell from Hilltop Securities.
Can you maybe flush out a little bit about your capital plans, you have kind of a fortress balance sheet at this point. I know that you're sensitive to the cycle, but anything you can do in regards to shareholder return besides just capital gains in riding the cycle, I mean you have a relatively de minimus dividend at this point.
Chris, we’re supposed to stick to Q4 and 2017, but I don't mind answering that question at all. What we're looking at is several options. We literally just had a board meeting this past Monday and we're considering a few options there and hopefully something will come from that pretty quickly. As you know, if you followed our story very much, depending on what copper does or what copper doesn't, the demand on the cash is pretty extreme. Majority of any type of exposure that we have as far as a bank line, really the debt service that we would need to take on from that matter would be relative to copper. So as we're sitting, it looks like a lot of cash. We have some ideas what we want to do with it and hopefully, restating I think, we'll have something come of it here pretty quickly.
[Operator Instructions] We have Julio Romero on the line from Sidoti & Company.
So just I was hoping you could give us some additional color on project activity and bidding and just any color that what you're seeing out in the marketplace at this time?
Are you wanting questions or is your question relative to ’18 or is it about ’17 announcement and Q4 announcement?
It's what you saw up to December 31.
We saw a really active market in the fourth quarter. And again the lead time from a quote to a purchase order shortened a little bit, which is a good sign. The size of the average order that we take in increased a little bit towards the end of year, which was a great sign. Everybody's paying their bills on time. All the things that we watch, Julio, wrapping up 2017 ended on an uptick as far as the indicators that we try to watch.
And I was just hoping for some additional information if possible on the utilization rates you currently have at McKinney and any possible room to, if there's a surge in demand or just any color on your current utilization rates at this time.
We're running all of the plants currently, five to five and a half days, occasionally we’ll run six days on a cleanup basis. The flexibility that we have here manufacturing wise, it's hard to give you just a straight utilization rate that would be pertinent, but in that sense, we're running 24 hours a day, five and a half days a week, maintaining our order feel rates, growing the business and growing it with the existing customer base that we have. Five and a half days would be the easy answer to give you. As far as percentage on that, it depends on the product mix from commercial to industrial to residential, because that does change.
We had a really good 2017 in the residential area. All three areas were up pretty good. So in an overall generic answer to your question, I would say we're running about 65% to 70% at the current product mix. We can do some things here differently if we need to. We can swap the teams over and run this for that and we can share plant time and there's quite a few things to do [indiscernible] it feels like right now that we're really busy. When you look up and you still have a day and a half or so to catch up and fill in some order. So right now, it's good, not great, but good.
That's good to hear. And then just given the recent tailwind regarding the industry consolidation, obviously, that's very good for Encore Wire as we think about it going forward. But given the global raw material backdrop right now with rising commodity costs and where copper is today, how should we think about Encore Wire and maybe spreads maybe not next quarter, but maybe two, three, four years out, given this -- given if raw material prices sustain at at least the current level where they are today.
Well, after almost 30 years in the industry, there is not an answer to your question. If you're looking at ’17, it’d be restating the press release, but I told you what the spreads were, but in general, over a cup of coffee, if you and I were speaking about my opinion on spreads going forward, I think if business is similar in ’18 to what it was in ’17 and the metals numbers are similar, I think the spreads will be similar. I'll be honest with you, I don't know what the price that copper is going to be two to four years out. But I'm very bullish on copper. I've only been bearish twice, maybe three times and I was wrong both or all three times. So I'm super bullish on copper and aluminum going forward.
Again, in that vein, we're not betting our inventory or purchasing or whatever, I think, copper is going to go up, but I'm not buying a bunch extra in anticipation of my opinion coming through. So it's just a real tough question to give you what will happen when 65% of our cost is copper. And as you know, there was a difference of about $0.50 a pound in just 2017 from one quarter to the next, from second quarter to fourth quarter was right at $0.50 difference. So it's tough. I mean, I'm not trying to evade your question at all. It’s just I'm bullish on the future as far as copper goes.
Our next question comes from [indiscernible].
I just have a question on tax reform and I'm new to the call. So I wasn't aware, you don't talk about 2018, but could you at least give us your federal tax rate for 2017, so we can have some idea of what cash flow will look like next year.
Well, let me break that down into two pieces, if I could Bob and let's go historically pre the Trump Tax Reform Act. And so if we look at what we were trending through three quarters, it was right in the 31% to 32% range and that was basically coming off of on a federal basis the 35% statutory rate, which was reduced by the Jobs Creation Act or Section 199 as they refer to it, which really favored Encore Wire and we were able to get a 3% to 4% rate off the 35%, because we do manufacture all of our product right here in McKinney, Texas and that act was designed to incentivize people to produce in the United States.
On top of that, we had about a 2% at most state tax rate in all the municipalities and jurisdictions we sell in, in the United States. So it came up to about a blended 33, 34. The Trump tax rate eliminates the Section 199 deduction, however, it takes the rate from 35 to 21. So for the full year, we pulled down our deferred tax liability, which we had been building plants and equipment. We had been taking accelerated depreciation on those for taxes as allowed with bonus depreciation and had been deferring paying income tax into the future.
To that extent, when the law came effective, we were able to reduce that future liability from a 35% rate to a 21% rate and therefore our effective tax rate for the year, having said all of that, wound up being 16%. That's with the big adjustments.
Okay. Going forward, for three quarters -- through the first three quarters, we're looking at roughly a 10% or a third benefit?
Right. You will look at basically coming down from a federal rate of let's just say 32, 33 to 21. A solid 10%.
One more question. Could you give us CapEx for last year and are you willing to say anything about CapEx needs for next year or this year?
Yes. CapEx for last year clocked in net of a few little proceeds of assets at $20.7 million net addbacks. The current schedule we have for projects that are either on the books with POs issued or contemplated and a few projects that Daniel and the board and our manufacturing people are working on. Right now, our projection is we'll spend in ’18 somewhere in the neighborhood of $25 million to $30 million.
Our next question comes from Bill Baldwin from Baldwin Anthony Securities.
You guys and your team are doing a heck of a job, have been for a long time with the payoffs finally beginning to show up. That's good, that's real good after all the hard work you’ve done. Number of my questions have been answered, but I thought I'd just check in and see of what the picture looks like to you, regarding availability of your raw materials, not price I'm talking about, just availability, good availability of both all the raw materials you need, not only copper and aluminum, but some of the other processes and so forth, how do you see availability based upon a pretty constructive outlook for next year. Volumes increasing likely, are your vendors able to take care of you properly?
Yes, sir. We've been very loyal over the years to a pretty good group of vendors and what have you. So, we could not be more pleased with the service and the people that we deal with and so forth on the copper. We do very well on our sourcing. We've got probably the best team from a purchasing standpoint, reputation wise and so forth in the industry, headed up by Janet. They all did a great job. The planning for the volatility is a little easier than it would appear to be because the way things are done on an average basis, but things are a little bit tighter, as you know Bill and I'm sure that it's no secret. Every publication that you read today has some article or comment about the trucking industry. Trucks are tight, but they're tight for everyone.
So, we’ve dealt with that over the years as well, but for the most part, the service and the quality that we receive from our vendors, we blend our own plastic on side here. We compound. So we buy the raw materials and the world class vendors, they do a great job for us. Again like I stated, the copper folks do a phenomenal job for us. There are office folks as well as there are outside sales folks. They do a great job for us. We're very well taken care of.
The trucking thing is tight inbound, it's tight outbound and it's going to continue I believe to be tight. A lot of changes went into effect as most industry folks know from a trucking standpoint back in December about the driver's requirements and then equipment tied. It feels like we're super busy, Bill and things are going along pretty well. We came out the other side of some of those devastating hurricanes that hit the Gulf where most of the world's PVC supply, at least there's a presence down there for most of the world's supply, but in that vein, we've not had supply disruptions from the raw material standpoint and I think that's a testament not only to the folks that we've chosen to buy from, but the reputation of our purchasing department is pretty solid.
So outlets are tight, stretch film can be tied. I mean, everything that you buy today as a consumable item on the shipping dock is a little bit tighter. So, people are busy, people are ramping up to catch up and we're rolling along, but we’ve not experienced any outages of anything, but it is tighter for sure.
I’m curious your single plant location helps you out, not only on your ability to service clients, but also on your ability to receive raw material?
Yes, sir. We're very proud to be in Texas and also McKinney. We think it's a great spot to be.
Our next question comes from Robert Fetch. He's a private investor.
A question in regards to, you just had answered the logistics question I had, but anything going on on the new product front.
We didn’t announce anything in the fourth quarter nor in 2017 Robert and other than the response that I gave the earlier caller from Hilltop, Chris, we're working on some things. We just haven't announced anything yet.
And then on the market share and distribution front, geographically, are there under-served areas and/or however you measure market share, especially against your largest and major competitors, are they shifting in any regard with in mind some of your issues over the last couple of quarters you've talked about, about some other lesser competitors who maybe haven't been pricing as business like this would prefer.
That's a great question. There is discrepancies in pricing in different markets for whatever reason. And some of it does make business sense, some of it doesn't. The only thing I can figure is it's not their money or they wouldn't be spending it that way. The other side of it would be though, specific to your market share questions, we have a pretty good idea of our market share along with one of our larger competitors, it's easier to lump those two together and it would be to split those two out in a specific market versus the other.
But being the only publicly traded company in the area, there's no real public numbers as far as that goes. So we're going on some anecdotal stuff that we pick up and experience in time and, but our market share in some areas and there's other areas where there's a lot of room for improvement. Again though, we only specifically to the fifty states. Outside of that, I really couldn't comment. We don't compete outside of the fifty states.
We have had, over the years Robert, we probably had 25 or 30 competitors way back and we're down to just 6 or 7 maybe. And competitively speaking, in 2017, there was some disruption from imported materials and imported wires and some product categories that was super disruptive. But in spite of that, as you saw on the earnings, we had a really good year. So I don't know if that answered your questions. I just have to be super careful on being really specific on market share stuff. And I think four out of the six competitors are on the call.
Also in regards to the issue around labor, can you comment on to what degree your labor costs were up last year and what do you expect for ’18 and availability of labor as well and/or turnover.
Yes, sir. We made some voluntary changes on the increase in pay. It was our choice. We started to earn more, so we paid more in that sense. So, overall our labor was up a little bit. The availability of people, there are some holes that we'd like to see filled, but rather than know sit back and wait for someone else to do that, we've established some of our own in-house training and we've partnered with some local colleges and formed some classes that we're teaching and we also have departmentally set up over the last 12 to 18 months, ways for folks to earn a GED or hostel equivalent here. There is just a lot of things we have going as far as projects, but in the big picture, we could use 35 or 40 good people today.
We’ll probably hire half that and continue to search for the other half and by that time we'll need another 15 or 20 folks. So we're constantly hiring and upgrading and trying to do the things as most companies are doing I would think, I do think that there's some unemployment in this area that we're in. So we're getting some really pretty good applicants and the volume again and not great, but it's good. And most of the folks that we’re hiring in, they want to work. You just got to be careful not to hire them in June and July in Texas because August it's going to be hot and those things that we try to do to adjust for that and in ’17, in the fourth quarter specifically, we did hire quite a few people and we also upped our pay scale across the board.
And lastly can you define or describe your management incentive programs and whether there's been any recent changes to them?
I could give you our management incentive programs without speaking too specifically, but we did change up a few of them in 2017, not significantly. There's quite a few that come to mind specifically, but I really don't want to go too far in to the personnel side of what we're doing specifically on the call. As I mentioned, four of our six major competitors are on the line and there's a pretty good competition for people in our industry. So I’d rather not go too far in to that.
Are they spelled out in your filing?
Not specifically to any one specific person or area, but they’re in broad terms. Yes.
Our next question comes from Fritz Mori from Mori [ph] Capital Management.
Looking at my cost basis, I'm pretty happy this morning. Things like most of Wall Street is too. My question is, we've had a slew of natural disasters this year from floods to hurricanes to fires, mudslides and tremendous snowstorm going in the northeast, they're all going to need wire. Last year as we look back, can you tell me the impact that had, especially probably fourth quarter, but your sales increase for that year.
Yeah. It's tough to give you an exact number, Fritz. What ends up happening is, it's not one specific lump that comes in. It's over time, it's not an immediate kick. However, as you would think, non-metallic, which is a residential product has paper inside the jacket and if that gets wet, it can grow bacteria and decompose. So residential product has to be removed anywhere you saw water that would encroach on someone's residential property. So in that vein, we did ship a significant amount of residential product into those geographical areas that were hit.
There was also some pretty heavy duty industrial cable that goes in as an emergency power type cable, but outside of that, Fritz, it's a pretty long drawn out slow process to decide if they're going to rebuild, if they're going to completely tear down, if they're going to refurbish, whatever the decision is going to be. The Houston market was somewhat different than other areas in the past. They want to get and rebuilt a lot of those neighborhoods pretty quickly and so we did see a bump in that area.
But again, it's more a little slower and longer over time than it would be within a particular month or a particular quarter other than the caveat being Houston was pretty quick and a nice little uptick in that market, but the rejuvenation part of it continues on and then they'll decide to tear down and rebuild and the whole timing of insurance payments and there's still quite a few vehicles that were flooded, sitting in fields that were leased out and they’re still hauling trash and debris and whatever out of a lot of those areas.
So it's a long drawn out process. We still are seeing recovery effort type construction things in New Orleans from several years back. So it's as tragic as it is for a lot of people and it is awful. It's a long drawn out. We do get to ship some material into those areas.
Just one last question. As you know, I have just pretty good information on Puerto Rico and what’s caught on down there and I'm just wondering, is that going to flow through to, I mean, that’s one of our states, but I don’t if you go that far, is that going to have any impact at all?
Yeah. We saw some photographs and actually talked to some folks that were on the ground. I guess I should have qualified saying a long slow drawn out. That's truly a longer slower more drawn out scenario, but look the material is starting to flow into those areas and basic supply demand takes over and there will be some positive stuff business wise that comes out of that for sure.
[Operator Instructions] I'm not showing any further questions in queue.
Okay. Well Maddie, thank you so much for handling the call and we appreciate the callers and look forward to speaking to you after the release of Q1 ‘18. Thank you very much.
Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.